Sunday, November 30, 2008

"Those That Have Not Yet Embraced Frugality Are About to Have Frugality Embrace Them"

A sidebar to the current banking crisis is the Rightsizing occurring at banks across the US (rightisizing is just downsizing in a pretty package).

As part of the JP Morgan/Washington Mutual merger JP Morgan plans to cut up to 19,000 jobs this weekend as reported in Forbes.

"Up to 19,000 employees of Washington Mutual face being laid off this weekend as JPMorgan Chase turns up the synergy on its recent acquisition.

On Friday, JPMorgan Chase said it expects to retain the 22,000 employees who work at Washington Mutual branches and 2,000 workers in the mortgage and wealth management divisions in California, spokesman Tom Kelly told Forbes.com. The company has not yet determined the total numbers to be cut in other states, but it planning to inform all former WaMu employees of their job status by Monday."****************************************************************************Black Friday SalesThere was a good deal of press coverage over the weekend about the amount of Black Friday Sales in the US. Clearly, the expectations are that spending will be down this year, but somehow spending was up 3.3% according to ShopperTrak.

How does that data merge with expectations? Well, some of the growth in Black Friday sales is probably due to a delay in spending (I saw one recent poll that said only 10% of people had started shopping as of mid-October) and the shortened shopping calendar this year (27 shopping days between Thanksgiving and Xmas vs 32 days last year). Also, the composition of the sales (loss leaders versus full price items) will be important to understanding the value of these sales to the retailers.

However, I'll admit to being surprised by the small uptick in sales. The rampant consumerism of the US never ceases to amaze me.

As I suspected, trading was thin last week and muscled around by relatively few buyers. But you can't overlook the 15-20% bounce in a week. This is basically the biggest one week move in about 75 years. Unfortunately, that last big bounce occurred in 1932 and I think we know how that played out. The volatility remains in the market, but the retail data might help hold things up for awhile this week.

It's been some time since the markets have had to focus on Geopolitical events, but the tragic events in Mumbai this past weekend have refocused the market watchers on international incidents. Hopefully, cooler heads will prevail, but be aware that tensions are rising between India and Pakistan faster than anyone can predict. Both countries are said to be reallocating military resources toward their shared borders. Yikes!

Friday, November 28, 2008

I think I mentioned last week that Thanksgiving week is a historically volatile week when prices are pushed around on light volume. That has been the case this week as the news continues to be terrible, but stocks have continued to shoot up as sellers have been away visiting family.

The next month should be interesting. I think the trend has reversed a bit, but the sellers are getting ready to pounce again and year-end tax loss selling might create more volatility over the next month. It should be interesting.

********************************************************************One of the most underreported stories is the midst of the credit crisis has been the tremendous amount of commercial real estate that was built with easy money in the past few years. Hotels, strip malls, condos, etc., were all built beyond demand because the money was there.

"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

The retail outlook is particularly bad. Circuit City and Linens 'n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.Those retailers typically were paying rent that was expected to cover mortgage payments.

California, New York, Texas and Florida _ states with a high concentration of mortgages in the securities market, according to Fitch _ are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia."

Commercial real estate has been a huge boost to local tax revenues. If commercial real estate stumbles look for another round of pain for local governments.

I'll start by confessing - I'm not a shopper. I hate the randomly wandering a store with the idea that I might stumble upon some deal. So you can imagine how much I enjoy Black Friday.

There was just a story on the local news in NYC about a stampede at a Walmart store that caused injuries and at least one heart attack. Really? To save $50 on a GPS?

The best "deal" I saw in Walmart'sflyer is $598 for 42" 1080p LCD TV. That's about $100 less than similar TV's but there is no need to go out battle the masses. Walmart and all other retailers have these deals online. You click add to cart (choose site-to-store shipping at Walmart) and avoid the hassles.

Finally, I spent a half an hour going through all of the flyers yesterday and frankly, if you check any of the deal tracking websites (Dealnews is a personal favorite) you'd see that none of the prices advertised were meaningfully better than the average price online recently.

The age of consumerism is finally coming to an end (although you wouldn't know it from watching the images on TV this morning).

Wednesday, November 26, 2008

The Big Picture beat me with this post, but it's worth a duplicate post.

A simply stunning image of where your government has managed to spend about $8 trillion this year. Now, not all of it is "spent" much of is in the form of guarantees, but those guarantees can come back to haunt us if things don't turn around.

Given the level of competence displayed by most public officials as of late, I'm sure this money won't be mismanaged at all.

I'll note that there was a study that reviewed the current volatility in the markets. The past 50 days have been the most volatile in at least the last 100 years. It's interesting to note that most of the most volatile periods (29, 31-33, 87 and 2008) have periods of prolonged weakness in the markets.

Monday, November 24, 2008

This guy represents how I feel about all of these bailouts. Wow, that's going to leave a mark.

The details via Bloomberg....

"Citigroup Inc., facing the threat of a breakup or sale, received $306 billion of U.S. government guarantees for troubled mortgages and toxic assets to stabilize the bank after its stock fell 60 percent last week.

Citigroup also will get a $20 billion cash injection from the Treasury Department, adding to the $25 billion the company received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend. Citigroup rose 53 percent to $5.75 at 8:37 a.m. in New York trading today. "

Guarantees for $306 billion!!! Where is the outrage? Citibank was not a quasi-government agency but now their bad bets are guaranteed by you and I. Unbelievable. I'm stunned at the lack of real reporting that is going on around this subject. No one bothers to read the term sheet, everyone just picks up the same talking points off Bloomberg and recycles them.

Also, I wasn't a proponent of the $25 billion going to the auto companies, but Detroit has to be steaming today as the Fed's found it necessary to throw another $20 billion at Citibank (on top of the $25 billion they gave them about 4 weeks ago) with about 10 minutes of discussion over the weekend (no Congressional hearings necessary).

I think it's clear that we are in uncharted waters....

********************************************************************Separately, the homebuilders are coming to Washington begging for their own bailout.

The Commercial Real Estate lobby will probably try to get in on some of that $$$.

"The builders' lobby is ramping up its sales pitch for a $250 billion stimulus package called "Fix Housing First," arguing that financial markets won't recover until home prices stop falling. They are calling for a generous tax credit for home purchases and a federal subsidy that would lower a homeowner's mortgage rate."

Hey, it's just another $250 billion. I can't reiterate enough - we have an excess of housing inventory that can not be "fixed" through financial games. Over the next two decades if we re-emerge as a global economic force, creating jobs in high growth industries then housing inventory will be reduced as demand picks up. Artificially stimulating demand through tax breaks is a silly concept that benefits only one group - the builders.

Sunday, November 23, 2008

Citigroup seems to be edging back from the brink by working with the Federal government to separate it's good bank from it's bad bank. The Federal Government will apparently step in to assume losses beyond a specified amount.

"Federal regulators on Sunday were working toward a rescue plan for Citigroup, whose stock has plunged in recent days over fears of its exposure to toxic mortgage assets, according to a source familiar with the talks.Details remained unclear Sunday evening and several reports stressed that a deal could still fall apart. But the plan reportedly centers around a government guarantee of some of Citigroup's loans. Under such an arrangement, the government would back loan-losses above a certain level. The goal: Restore confidence in Citigroup's viability.

An announcement could come as early as Sunday evening, according to several reports."

The futures are up late Sunday night on news that a deal is in the works. We'll see what happens.

***************************************************************************Also, look from word this week from the incoming administration on their plans for stimulus part 2. I'm concerned by the initial direction of the plans put forth, but the markets will likely love any sign of stability.

Congress seems determined to send out another check or cut taxes another $500 so you can go buy a 37" flat screen at Walmart, but this crisis was born of 30 years of failed policies and short-sighted planning and won't be fixed by carelessly throwing more money at the problem. Our goal should be to fix things for the graduating class of 2020, not propping up home values in Arizona. Unfortunately, that sort of painful planning is unpopular and is never going to get off the ground. It requires long-term strategic thinking that forgoes the easy payday in exchange for a brighter tomorrow. It's the sort of "We First" thinking that got us through the 30's and 40's, but has been replaced by "Me, First, Second and Last" thinking that has permeated our culture.

Saturday, November 22, 2008

Wow. The market slowly started to rally on the news of a Treasury Secretary had been settled upon late Friday afternoon. That rally built upon itself until the programs kicked in (back above 7800 on the Dow) and then they screamed into the close soaring 200 pts in the last 10 minutes again. Again, this is not the action of a healthy market. This is like the gambler that puts his last $100 on 9 at the roulette table instead of using that cash to buy a bus ticket out of Vegas.

I think they could have named Barney The Dinosaur Treasury Secretary yesterday and the markets would have rallied. The market was acting very strangely all day, every time they tried to sell off the market, it stopped right at break-even. Someone clearly had a very, very large buy program in place to buy every dip. As I said on Thursday - Fridays during option expiration can be very strange trading days. In fact, there were enormous put options outstanding under 800 on the S&P. More than a few people in the know have suggested that it was cheaper for someone to push the market higher on Friday (and ensure those options expire worthless) than to absorb the losses the puts would have caused. It's an interesting theory at least.

The irony of this move was that just 1 hour before the close all of the talking heads on CNBC and CNN were saying "No one wants to be long going into the weekend". In fact, the market swings have become so swift and so violent that the commentators often can't keep their stories fresh with the data. Often you'll hear someone on MSNBC say something like "stocks are off on concerns about Citibank" and then they'll check the markets and the Dow is up like 200 points. Hilarity ensues.....

With regards to the proposed Secretary of the Treasury - Mr. Geithner - I don't have a clear read on him yet. However, it should be noted that he was widely viewed as the Fed Governor that spearheaded the decision to let Lehman Brothers fail. This decision is viewed by many (including myself) to have contributed to the current market turmoil. If you extrapolate that decision to other issues facing the markets right now (Citibank, GM/Ford/Chrysler) I think it is safe to say that the risk of bankruptcy for some or all of these companies actually goes up under Mr. Geithner (although in all likelihood the issues at Citibank, GM/Ford/Chrysler will be long behind us by the time Mr. Geithner takes over).

In fact, the Wall Street Journal reported today that "Members of General Motors Corp.'s board of directors are willing to consider "all options" for the ailing auto maker, including an eventual filing for bankruptcy protection, a stance that puts them in rare disagreement with Chairman and Chief Executive Rick Wagoner, people familiar with the matter said".Citibank's status on Monday morning will likely determine the near-term trend.

Thursday, November 20, 2008

The velocity of the market moves are catching everyone off guard. We are living through historic times in the markets, but the great difference between today and the closest comps we have for these markets (81, 74, 29-33) is the great access to information and the technology that has sped up trading in the markets.

Let's use 1981 as an example. If you were concerned about a stock's prospects in 1981, you'd do some research and eventually make a call to a broker at Shearson to have him sell your shares. Today's electronic order formats make it possible for professional and semi-professional traders to buy and sell that same stock 10 times in the blink of an eye.

Today, the markets were up about 100pts on a rumor of an auto bailout agreement in the Senate. In the midst of that reporting, an email is sent to an on-air reporter at CNBC and he say's that the House views the Senate deal as a "non-starter" and the markets instantly reverse. Simply stunning.

The next 8 days could be very, very volatile with option expiration tomorrow (there were a lot of weird option trades today - it looked like people betting for a huge snapback rally) and a very thin market as the Thanksgiving Holiday approaches.

We've broken through any meaningful support and the markets look to be racing to the next support levels of 7,000. Again, people keep saying "if the S&P earns $75 next year we're trading at 10 times earnings which isn't bad". Right, but it's not cheap either - I think 2009 earnings might be as low as $55 (or lower if things don't get fixed in a hurry) and we could trade at 8-10 times that number. Again, this would be a nightmare scenario, but I think there is a plausible argument for Dow 5,000 next year. I still think it's less than a 40% chance, but I thought that we had less than a 5% chance of breaking through 5,000 about 3 months ago.

********************************************************************Just to provide a little insight into the level of fear in the markets, the 3-month t-bill (the equivalent of a 3 month CD with the US Government) was yielding 0.015% today. In effect if you invested $100,000 in US t-bills today you'd earn $15 - yeah, you read that right - $15 in 3 months.

In essence investors are so scared of taking any risk they are willing to take practically a zero rate of return in exchange for a just getting their money back in 3 months. The irony of this move is that I'd argue that the US is demonstrably worse credit risk today than we were just 6 months ago when rates were much higher. I think that over the course of the next few years this will reverse itself meaningfully when global investors begin to question our ability to repay our debts. But that's another nightmare for us to deal with on another day.

**********************************************************************Oil - In the midst of all of the global panic, we've lost sight of a major collapse in oil prices. In July oil was $147, today it closed at $48.25. Basically, down $100 a barrel in FOUR MONTHS! This is an enormous collapse and the economic and politically ramifications will be significant.

Economic - cheap oil is, unfortunately, still the grease that moves the global economy. I'm still a believer in higher oil prices in 2009-2010 (weaker US dollar and a resurgent Asian economy), but $48 oil will help every industrial company's bottom line. Think of a company that has huge oil inputs on the costs side that raised prices all summer to catch up with oil prices. Do you think they are cutting prices now? Not a chance. This should bolster many companies in the coming months.

Political - I'm out of my league talking about the politics of oil, but suffice to say that the Middle East, Russian and Venezuela are much calmer places when oil is $100 a barrel. At $48 a barrel, they are stressed out and at $30 a barrel turmoil is sure to ensue.

I still contend that the natural price for oil is in the mid $60's, but we overshot on the high side, and we are going to overshoot on the low side.

*********************************************************************

Finally, just when you think you've had a bad day, imagine what this guy's day is going to be like first he gets a speeding ticket and then.......oops!

Wednesday, November 19, 2008

1) Markets - As I noted at mid-day, the markets were flirting with breaking down and they finally couldn't hold those old support levels. A lot of fast money bought the market last week on Thursday when we bounced sharply off the 8250 level. The retest held for a day, and then we began the slow gradual grind back down. This is a classic cycle in deep bear markets - rally up 10% one day and then lose 2% a day for the next 10 days.

Allow me a moment for a little tutorial on technical trading strategies. Let's say you have $100 to buy stock in the S&P 500. When the S&P started to bounce on Thursday, you might allocate 25% when the market first held, another 25% when the market was 2% off it's lows, another 25% at 5% off the lows, etc... until you are fully invested. Then you establish floors and set standing orders to sell the market if it falls to certain levels. This either locks in your gains or prevents losses depending on where you put in the floors. A lot of people had trading floors in around 8,200 in the Dow and when we took that level out more and more orders hit the floor. For an idea of where we might be headed take a look at the NASDAQ over the last couple of days since it broke support. We may bounce again sharply b/c of option expiration and the weird trading that occurs during Thanksgiving week (extremely light volume leads to weird swings) but the charts say we are going much lower and the fundamentals don't look any better.

The next levels that people are pointing to are down another 12-20% (7k Dow, 680 S&P 500, 1100 NASDAQ).

Wouldn't it be nice if we could all agree to stop watching the markets and go back to the business of business?

2) Automakers are getting no love - I really felt that a bailout of some form would come from Washington, but nothing seems to be on the horizon. The Screamer from Short Hills (aka - Jim Cramer) has said that without a bailout the Dow is going to 6,000. That's going to make some people more than a little nervous.

While I'm on the subject of bailouts - any bets on who is next to ask for a big bailout? I think it's even money between GE (yes, my beloved GE - I'm long this puppy since 1994 - what a shame) or Commercial Real Estate.

If you think the car companies can come up with some scary numbers, wait until a group of giant mall operators comes to Congress saying that without a bailout they will be forced to shutdown 17,000,000,000 sq ft of commercial space, putting 780 million people out of work (please ignore the fact that only 300 million people live in the US - we can't let facts get in the way of our plea for bailout C-A-S-H).

3) Personal Budgeting - This is a good time of year to be especially aware of loose spending habits and to try to gain control. As many of us have found out over the years any attempt to lose weight is most successful when achieved through healthy diet and exercise. It's not fun or easy (trust me -- running around Clayton in a 25 mph wind when it's 22 degrees out is the definition of NOT FUN), but it works.

When looking to cut credit card debt or avoid debt all together, the same is true. It's not easy or painless, but look for areas that have flexibility and cut back there first. I think everyone is going to have to be more cognizant of not just how much they are spending but how they are spending as banks look to improve their profitability through fees and higher interest rates.

Having said all this, the Bank of China will probably announce a new stimulus plan to give away 50" HDTV flat screens to anyone with a $40 digital converter box coupon and the market will soar 6,000 points (Normally, I charge for that kind of snark, but in the spirit of Thanksgiving that one's on the house).

In light of all the gloomy news I thought this picture might lighten your mood....

The Dow has been garnering all of the headlines of late, but the NASDAQ finally broke down below support two days ago and is setting a pretty ugly tone for the market.

NASDAQ June 4 1997 - 1404NASDAQ Nov 19 2008 - 1420

The S&P 500 has not closed below 848 and has bounce 3 times off the 830 level, but we are at 827 right now. If the markets stay under this kind of pressure for the remainder of the day it could set up for an interesting end of the week (Friday is option expiration which generally adds to volatility).

1) Bailouts R US - When I first heard this story last week, I assumed that it had to be a joke. In essence, a taxpayer advocacy group (www.taxpayer.net) got a copy of the application to get a piece of the bailout.

Trust me it's worth looking at this thing. 2 PAGES!!! I had to fill-out a longer form to buy a NY State fishing license this year. Has anyone ever filled out a banks application for a loan? How long was that application -- 200 pages, but the Treasury can get all the info they need on a two pager?

The Treasury assures us that there is a lot more too getting the money than this application, but I'm not sure that anyone has any idea what they are doing. This form looks like some MBA flunky drafted it while Facebook was down for routine maintenance one night. The level of incompetance demonstrated by Congress and the Treasury is simply stunning.

2) Markets - The Dow had a nice little reversal (up 300 pts in the last hour again) on very little news. I suspect that some program trades kicked in to account for BUD's acquisition by InBev (since BUD went away, funds that track the S&P 500 had to redistribute their $$$ into other stocks to rebalance). This buy program perked up stocks some and then everyone was afraid to miss another 10% rally off the 8,200 level so a few more people bought into the close. I'd note however, that the S&P and NASDAQ have both violated previous closing lows and are not acting well. We'll see....

3) The latest news on the economy has been jaw dropping. It's hard to know how much weight the big investment banks still carry, but Goldman Sachs published a note tonight with a couple of scenarios for the economy - either case - "Just bad" or "Ashlee Simpson Singing Bad" - would show Q4 GDP down 5-8%. These are numbers that we haven't seen since a bunch of college kids beat the mighty Soviets on a frozen pond in Upstate NY (Do You Believe in Miracles? YES!!). I've said for some time that this recession feels alot more like 1981 or 1974 than 1991 or 2002. The rest of the world seems to be coming around to that line of thinking.

This is a little off-topic, but this story caught my eye today. The lack of vision in the healthcare industry is at least partly to blame for this trend. Doctors today are burdened by so much mundane record keeping, that it leaves precious little time to actually treat patients.

I don't see an easy fix to this situation, but when 60% of Doctors would not recommend their own profession it is a pretty stinging indictment of our current model.

I try to avoid commenting on specific companies, but Hewlett Packard's earnings release seems to have turned the futures around pretty sharply as CNBC and the rest of the financial media are running the "HP GUIDES HIGHER" tagline.

Well, that's only a half of the story.

It is true that their estimated earnings per share are expected to be slightly higher for next year (up from $3.85 to $3.88 to $4.03). Up about 1 - 4% over the old number, not bad in this environment.

But let's look a little deeper.......HP lowered their Sales number by $5 to $8.5 BILLION for next year, but they expect to make more money? Huh?

Here's the devil in the details.....Earnings per share are calculated by taking a company's net income and dividing net income by the number of shares outstanding. In September of this year HP announced a plan to repurchase $8 billion of their own stock. If they completed this repurchase, it would reduce their shares outstanding by over 10%.

Thus, this "INCREASE IN GUIDANCE" is just math slight of hand. Reduce the denominator 10% and your result will go higher even if the numerator goes down 5%.

The markets are all rallying on this news, but I'd expect smart people to see through this fairly quickly.

Monday, November 17, 2008

A) I won't spend too much time on the Cuban SEC case. Mr. Cuban is a knucklehead as an owner and literally fell into his money (selling Broadcast.com - yeah what the heck was that - for billions at the top of the dotcom bubble), but he's been pretty good at seeing tops in the markets. Two things jump off the page with regards to this case -

1) $750k? You're worth $2 billion and you make a blatant trade the day before a PIPE is priced to save $750k? That's either stupid or arrogant or both.

2) How in the world did it take the SEC FOUR YEARS to gather enough evidence for this case?? The guy is a 6% holder and he sells the stock the day before the PIPE prices and it takes 4 years to prove that he had inside info?!?!?!? I think the SEC might need a bailout too.

Cuban has probably learned from the lessons of Martha. Tell the truth, pay the fine, and go back to being the worst fan in the NBA. If you lie about trading under oath, you'll go to jail. That won't happen here.

B) Pensions are getting crushed. The 100 largest US pensions were slightly overfunded (had more assets than projected liabilities) at the start of 2008. Pensions are currently underfunded by about 7% and that number is expected to continue to fall through the balance of the year.

"In October, pensions faced a record asset value loss -- more than $120 billion -- and after adjustment for liability gains, surrendered a total of $59 billion, dropping pension funding to 92.7%, a 12-percentage-point decline from the funded ratio at the beginning of the year."Pension accounting is perhaps the least understood aspect of financial analysis, but suffice to say that this firm that focuses on US Pensions, estimates that earnings will take a $40 billion hit in 2009 from underfunded pension liabilities. I don't think this is factored into 2009's earning forecasts. This will be another headwind facing the stock market in 2009.

C) GM is apparently the third rail of economic blogging. I'll avoid making any judgements on the validity of a bailout because I can really only comment on the financial viability of the Big 3 (which is really, really bad) but I thought I'd pass along some new news on the GM front as they are delaying making incentive payments to dealers in an effort to conserve cash.

Mr. Market is right back around this 8,250 level. The last time we were here (WAY, WAY back on WEDNESDAY!) stocks sold down under 8,000 before soaring almost 1,000 points. Even traders are starting to feel a little fatigued by this action. I'm a little concerned by the lack of coverage of this latest sell-off - if we close at new lows and no one notices, it might cause a rapid retracement (or they might try to buy the bounce again and make 10% in a day!). Crazy times.

Well, Japan joined Germany in officially declaring a recession earlier today. For all of the talk about emerging economies like India and China, people often forget how important Japan and Germany are in the global economy. The US is by far the global GDP leader, but Japan and Germany are the next two largest economies in the world.

The Japanese and German economies slipping into recession is not a surprise, but it fits with the theme that our global economy is still extremely linked. Note that fewer and fewer people are using the "decoupling" word on TV (decoupling is the idea that Asian and European countries were growing on their own and not dependent on the US for growth - I don't think anyone is going to win a Nobel prize for that idea anytime soon).

1) Citigroup is looking to cut 50,000 (!!) jobs - It's not clear where these job cuts will come from but 50,000 white collar jobs is another big hit to the economy. Citi remains a giant franchise in disarray and their CEO (Mr. Pandit), seems to have little ability to inspire the troops.

2) Genworth Pulls a Fast One - Genworth and Hartford Financial both figured out a way to steal from the US Taxpayer....... I mean gain access to the TARP. Most people don't know Genworth, but they were the enormous insurance arm of General Electric that sold insurance and financial products. The stock has fallen from $30 a year ago to about $0.90 on Friday. Ah, Congress in with all their financial expertise must have prevented loopholes in the TARP, right?

Hartford Financial agreed to buy a small savings and loan company on Friday, then convert themselves into an S&L and poof! Now they were a DISTRESSED BANK not a distressed insurer and they can get access to the TARP.

Genworth, loved that idea so much they did the same thing over the weekend. It's unclear what Genworth paid to buy Interbank fsb but with just $1 billion in assets, they probably didn't pay very much. The stock has doubled since Friday on this news. So by making a small investment in a midwestern S&L this enormous insurance company now gets access to the TARP.

I'm looking to buy an S&L if anyone has one for sale.........

3) Tech Slowdown - There was a good piece in the NY Times that highlighted many of the issues that I've been hearing. October "was like turning a switch".... pretty accurate.

In the span of just a few weeks, orders for both business and consumer tech products have collapsed, and technology companies have begun laying off workers. The plunge is so severe that some executives are comparing it with the dot-com bust in 2000, when hundreds of companies disappeared and Silicon Valley lost nearly a fifth of its jobs.

October “was like turning a switch,” said Robert Barbera, chief economist at the Investment Technology Group, a research and trading firm. “Everything pretty much shut down.”

Thanks again to the WWNY for hosting me on Friday. I think the video is still online here.

Friday, November 14, 2008

The retail sales data was the worst on record (since the data was collected in 1992) but Mr. Market seems to be holding his own right now.

There have three inflection points in nearly every trading day this month - 10am, 1pm and 3pm. There will be continued talk throughout the day about the G20 meeting and what packages might be announced this weekend, I expect that to lead to a bullish bias today. I'm not optimistic that anything meaningful will arise from this meeting.

Separately, yesterday's wild move got me thinking about intraday swings in the Dow. We have 16 of the 20 largest intraday swings in the Dow this year. Unbelievably the 9 largest intraday swings in the HISTORY of the Dow have occured in the LAST 6 weeks. Historic times.

Thursday, November 13, 2008

Well, in fairly short order the market retested the old lows and all the technicians bought stock on command because that is what their models tell them to do. The computer models also forced more buying as stocks ground higher all day. If you'd bought the bottom today you could have made a tidy 10% in a day.

I think people shouldn't underestimate the power of bloggers (real bloggers w/followings measured in hundreds of thousands, not my loyal but sparse readership) that spread the word that they were buying the markets when we tested the bottoms. Many of these bloggers are becoming what CNBC was during the dotcom era - their calls can move markets when they are well telegraphed.

I'll reiterate that healthy markets do not act this, swinging wildly up or down 5-10% a day. If you have access to good charts - check out the NASDAQ in March/April of 2000 when the NASDAW first started its historic breakdown. There were a number of violent swings that mirror the current action on Wall Street.

I think the perfect analogy for the markets right now is that of a fish. Watch a 35" pike sitting calmly in a weed bed and you have a sense for what the markets have been like for the last 80 years. Catch that same pike and pull him up on your dock - that same fish will flail violently as it fights for its life - that's the picture of our markets today.

We'll see if this can continue tomorrow.

On the flip side - the economy seems to be really falling apart at the seems. A quick summary of today's trouble signs.

I talked with a top-notch software sales guy today that heard a prospect tell him "I'd love to consider your product but buying anything right now is a job-killer". People are in complete lockdown and that's going to eventually be reflected in the valuations on Wall Street. Today's market seems to be pricing in a little 1-3% recessionary contraction, but I'm sensing a huge contraction in 2009 and that is not on any radar.

The bears turned bulls were hopeful that today would be the day we retested old lows, so they could get more bullish.

We retested those lows around 1pm and almost immediately you could see the flow turn sharply. There are two theories on the power of crowds. One says if everyone is running in one direction, they must know something and you should jump in. The other theory says they are are all about to run off a cliff.

The fact that everyone is picking the exact same bottoms makes trading this market very easy (just do the opposite of the crowd). These bear market rallies tend to be violent so watch out if this gains steam.

Having said all of this, business in corporate America remains stunningly bad - I'll follow up with some data points later tonight.

Wednesday, November 12, 2008

After a nice little 18% bounce off the closing price of 849 for the S&P 500 on 10/27, we've given up all of those gains and we're on the verge of breaking through these support levels. If we break through 850 (8200 on the Dow), the next stops are down around 760. Also, watch for hedge fund redemptions at 11/15. If the market breaks down again, expect people to buy aggressively trying to pick another bottom. This is trader's market that is not for the faint of heart.

The news tonight is painful on all fronts -

Intel - "Semiconductor giant Intel Corp. (INTC) slashed its fourth-quarter revenue view by as much as 20% because of "significantly weaker-than-expected demand," sending shares of the tech bellwether to 12-year lows and further rocking an already roiled stock market."

Applied Materials - Earnings fell 45% and "The job cuts represent roughly 12% of the company's global workforce and will come through a combination of work force reductions, attrition and voluntary separations. Applied Materials expects the job cuts and other restructuring measures to save $400 million.

The reduction is the second announced this calendar year by Applied Materials, which has suffered along with the rest of the semiconductor industry. In January, the company said it was cutting 1,000 jobs, or 7% of its employees at the time. "Asian Markets continue to trade lower tonight on continued global growth concerns and serious questions about the US leadership on the bailout. In the middle of the bailout process, Paulson has changed the game plan AGAIN in an effort to speed up lending.

However, I think someone needs to address the elephant in the room - even if the banks were attempting to lend, who in their right mind is feeling confident enough to step into a bank and borrow? I think this is the great mistake that Paulsonetal have made. They thought they could put a gun to the head of the banks and force lending, but if Frank the Baker has seen his sales slump 30% this year as Lehman and Bear Stearns shutdown, he's not going to rush to a bank to borrow under any circumstance. This is the great misunderstanding of all of the bailouts.

Our economy is finally experiencing the Great Credit Contraction of 2008. It should be interesting tomorrow.

Tuesday, November 11, 2008

I avoid political discourse like the plague - both sides are wrong more often than they are right - but if you get a chance to catch Gov. Paterson's town hall meeting that was on PBS tonight, it is worth a watch. His honesty about the severity of the economic crisis is scary but refreshing.

"Even as the economy slides into recession, many state and local governments continue to spend freely and expand their workforces.

State and local spending jumped 7.4% in the third quarter compared with a year earlier, the U.S. Bureau of Economic Analysis reports. Hiring increased faster than in any sector except health care.

Total state and local revenue grew just 2.6% in the third quarter. Sales tax collections fell 0.6% as consumers cut spending."

NY and CA are clearly the states with the biggest challenges in front of them. NY's economy has suffered a permanent shift, a portion of which is never going to recover. With major investment banks shifting to bank holding companies, the pay scale and profitability at the surviving firms will never be the same. So for all the local political sniping over standing up to "Downstate" - I have some unwelcome news - Downstate drives NY's economy and revenue from Downstate is likely to be permanently lower. This means fewer state jobs, reduced services, reduced state aid for education, higher property taxes, etc, etc. Funny, I didn't hear anyone run a political ad like that last week.

It's been a little while since we've talked housing. Housing has been covered far and wide by every major media outlet, but today there was a great chart that highlights just how deep the problem remains.

"Because of plunging home values, almost 90 percent of homeowners here owe more on their mortgages than their houses are worth, according to figures released Monday. That is the highest percentage in the country. The average homeowner in Mountain House is “underwater,” as it is known, by $122,000."

The best part of this article however is the fantastic chart which shows the number of homes with negative equity across the US. Clearly the problems in California, Nevada, Florida, Ohio and Michigan are substantial. However, I think this may just be the tip of the iceberg. If national housing prices start to take a realistic double dip we could see huge numbers of homes underwater in states like NJ, PA, VA, TX, CO, etc..

I think it is interesting to note that NY seems to be a relatively healthy real estate market with only 4% of homes facing negative equity and just 70k homes underwater. I'll note however, that Buffalo, Rochester, Syracuse, are more economically akin to Cleveland and Detroit than NYC/Long Island. So, I think there is little disconnect in the data. I also think that slower sales in the upstate region has masked the weakness in the market (fewer sales = fewer data points to use for comparrison) and they are probably underestimating the number of homes underwater in Upstate NY.

FYI - There are still over 2,300 listings in the local Multiple Listing Service - about 130% more than there were 4 years ago.

Currently trading $2.80 it looks like someone cut their brake lines at the top of a steep hill. It's hard to believe, but GM was trading at almost $30 in January of this year!

How long before GM is kicked out of the Dow Jones Industrial Average? Who will replace them? Maybe Cisco? They have a tendency to add stocks at their peak so Cisco would be a break from their normal pattern.

Monday, November 10, 2008

1) Amex- No one wants to be a bank holding company. American Express made this bold decision late today in an effort to improve their access to funding under the TARP. Is anyone left not asking for money under the TARP?

2) Nortel - Hey, Nortel's gone full-circle as another bubble has burst and it's back under $1. For a little perspective, Nortel traded at $1,200+ (Canadian) back in 2000 during the dotcom bubble.

3) Circuit City - Another telegraphed bankruptcy. I never understood who went to Circuit City anyways. The quality of products were better at Best Buy, the prices of equipment are always better at Costco, and customer service at Circuit City made J&R customer service seem friendly.

4) Target/Starbucks - Starbucks reported a 97% decline in net income (after charges, etc), but I thought it would be interesting to point out the Watertown PEAK again. Starbucks opened it's store in Watertown, NY in Feb 2007. SBUX was trading within 10% of it's all-time high at $34. Today, the stock is $10. I included Target as another example of the Watertown PEAK predictor - I think Watertown's Target opened in Spring of 07 as the stock traded $60+, it went a little higher before retreating to it's current level of $36.

5) GM - I don't have much to add here, but I appreciated the bold call out of Deutsche Bank that said the equity value of GM was likely to be $0.

A long time ago, in a galaxy far, far away Warren Buffett bought $5 billion of preferred stock of Goldman Sachs at $115 way back on 9/28/08 - FIVE WEEKS AGO! Warren gets $500 million a year in mandatory dividends and the preferred stock is callable at a 10% premium. Mr. Buffett also took warrants for another $5 billion of common stock at $115.

My concerns when I saw this deal were A) the price to Goldman and B) Buffett's limited understanding of the balance sheet at Goldman. Clearly, Mr. Buffett is a wildly successful businessman, but anyone that says they won't buy a stock like Google "because I can't understand it" but thinks he can understand the on and off balance sheet moves at Goldman is delusional.

Well any way, if you think Mr. Buffett got a good deal then you can now do about 40% better. Goldman's stock has traded steadily lower as of late - now around $70. This isn't an endorsement of Goldman or an indictment - I don't know if it's going to $200 or $2 - but I think it's interesting that even the Oracle of Omaha can be guilty of trying to pick the bottom a little too early.

This article highlights the depths to which people will sink to line their own pockets at the expense of you and I, the taxpayer. I've been screaming into the 25mph Southwest wind in Clayton for 2 months about the risk that we face from a Congress with little understanding of the financial markets and a treasury department with little restraint.

This is a 5 minute read from today's Washington Post. It's worth your time to read it.

Consider this the next time the banks, or AIG or GM or GE comes to Congress begging for a bailout.

In essence, there was a tax law that was designed to prevent tax shelters. If company A had income of $100 and company B had losses of $100, if company A bought company B, they could offset their earnings with B's losses and pay no taxes. A law was put on the books to discourage this sort of merger by limiting the amount of losses you could take in any year. The treasury department undid this law with a 5 sentence memo in September. In effect, it was a $100 billion give-away to the banks while we were bailing them out to the tune of $700 billion.

"The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. "This is part of our overall effort to provide relief," he said.

The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout.

"It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops," said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. "I've been in tax law for 20 years, and I've never seen anything like this."

More than a dozen tax lawyers interviewed for this story -- including several representing banks that stand to reap billions from the change -- said the Treasury had no authority to issue the notice.

Several other tax lawyers, all of whom represent banks, said the change was legal. Like DeSouza, they said the legal authority came from Section 382 itself, which says the secretary can write regulations to "carry out the purposes of this section."

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes.Yet lobbyists trying to modify the obscure section found that they could get no traction in Congress or with the Treasury.

"It's really been the third rail of tax policy to touch 382," said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute.'The Wells Fargo Ruling'

Senior executives from the banking industry told top Treasury officials at the beginning of the year that Section 382 was bad for businesses because it was preventing mergers, according to Scott E. Talbott, senior vice president for the Financial Services Roundtable, which lobbies for some of the country's largest financial institutions. He declined to identify the executives and said the discussions were not a concerted lobbying effort. Lobbyists for the biotechnology industry also raised concerns about the provision at an April meeting with Solomon, the assistant secretary for tax policy, according to talking points prepared for the session.DeSouza, the Treasury spokesman, said department officials in August began internal discussions about the tax change. "We received absolutely no requests from any bank or financial institution to do this," he said.

Although the department's action was prompted by spreading troubles in the financial markets, Carroll said, it was consistent with what the Treasury had deemed in the December report to be good tax policy.

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.

The tax world, meanwhile, was rushing to figure out the full impact of the notice and who was responsible for the change.

Jones Day released a widely circulated commentary that concluded that the change could cost taxpayers about $140 billion. Robert L. Willens, a prominent corporate tax expert in New York City, said the price is more likely to be $105 billion to $110 billion.

Over the next month, two more bank mergers took place with the benefit of the new tax guidance. PNC, which took over National City, saved about $5.1 billion from the modification, about the total amount that it spent to acquire the bank, Willens said. BancoSantander, which took over Sovereign Bancorp, netted an extra $2 billion because of the change, he said. A spokesman for PNC said Willens's estimate was too high but declined to provide an alternate one; Santander declined to comment.

Attorneys representing banks celebrated the notice. The week after it was issued, former Treasury officials now in private practice met with Solomon, the department's top tax policy official. They asked him to relax the limitations on banks even further, so that foreign banks could benefit from the tax break, too.Congress Looks for Answers

No one in the Treasury informed the tax-writing committees of Congress about this move, which could reduce revenue by tens of billions of dollars. Legislators learned about the notice only days later.

**********************************************************************Robert Willens is a former colleague of mine and he is still the smartest tax person I've ever met (excluding my wife of course).

Sunday, November 09, 2008

Solar-powered sails the size of a jumbo jet's wings will be fitted to cargo ships, after a Sydney renewable energy company signed a deal with China's biggest shipping line.

The Chatswood-based Solar Sailor group has designed the sails, which can be retro-fitted to existing tankers.

The aluminium sails, 30 metres long and covered with photovolatic panels, harness the wind to cut fuel costs by between 20 and 40 per cent, and use the sun to meet five per cent of a ship's energy needs.

China's COSCO bulk carrier will fit the wings to a tanker ship and a bulker ship under a memorandum of understanding with the Australian company, which demonstrates the technology on a Sydney Harbour cruise boat.

"It's hard to predict a time line but at some point in the future, I can see all ships using solar sails - it's inevitable," said the company's chief executive, Dr Robert Dane.

Once fitted, the sails can pay for themselves in fuel savings within four years, Dr Dane said. They don't require special training to operate, with a computer linked in to a ship's existing navigation system, and sensors automatically angling the sails to catch a breeze and help vessels along.

Anyone want to get together and drive to DC to ask for a bailout of for the Typewriter Industry? How about we bailout the telegraph industry? I hear if they just reconfigure their factories to include fancy new "voice" technologies that the US telegraph industry will come roaring back. Maybe we could get some options or warrants on the telegraph stocks......

Weekend Bailout News......

1) We're screwed with AIG - After throwing $85 billion at AIG about six weeks ago and another $40 billion in October, it looks like AIG needs another $75 billion or so. Now, this is starting to become real money. $60 billion would likely create a smart power grid that could eliminate 50% of our energy dependence on fossil fuels. Instead we're going to throw it at an insurance company that became a hedge fund that no one can really understand (disclaimer - when I worked at AIG in the early 90's it was a source of pride that we were smarter than Wall Street b/c we could earn money when others couldn't. AIG's organizational chart would make a grown man cry - All good things come to an end).

The Federal Reserve is near a deal to invest another $40 billion into the company, these people said, as part of a huge restructuring of A.I.G.’s debt. The government made an $85 billion emergency line of credit available in September to keep it from toppling and added $38 billion in early October when it became clear that the original amount was not enough."

2)China offers a Super-Sized Stimulus - China surprised few with their announcement over the weekend of a $4 trillion yuan stimulus plan (about $600 billion US). They had telegraphed this for some time and the announcement goosed the Asian markets about 5% (we'll see if it holds). This stimulus strikes me as strange. It's like Yao Ming has a growth spurt from 5'10 to 7'4" and then someone wants to put him on the racks to see if they can get him to 8'0". China should welcome a little break in the their growth. They are still set to be the dominate global economic power in the next 100 years. Well, at least they can afford it.

"The stimulus package, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, it said.

The government will allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan.

In addition, grain purchase prices and subsidies for farmers will be raised, as will allowances for low-income urban households. The government also scrapped loan quotas to help boost lending to small businesses."3) And finally, my favorite - The Big 2 1/2 come begging...

This is probably not going to win me any fans domestically, but the idea of throwing money at the Big 3 (2 1/2 once Chrysler winds down) is absolutely insane. I've said before that the Wall Street bailout was creating a slippery slope - who do we save? Car companies, Commercial Real Estate, etc, etc. Yes, Ford and GM employ many people in the heart of the US. Yes, those are generally good jobs. Unfortunately, they are good jobs with bad companies that make inferior products. The auto industry represents our past. I'd be much happier offering a 1,000 $1 million grants to engineers around the world to design a high quality 50mpg sedan. Then let VC's buy us out for a couple of billion and let them create a new auto industry.

What's truly stunning is that the new $5o billion request includes just $25 billion for operations (considering the companies are burning almost $10 billion a month, this is literally throwing money away) and $25 billion for retiree healthcare costs !!!! What? Did that $25 billion just suddenly show up overnight? Did they not know they were underfunding their healthcare costs? None of this money does anything to shore up their business - it just prolongs the inevitable.

Friday, November 07, 2008

-240k jobsAug and Sept revised down another -180kUnemployment up to 6.5% (highest level since 94).

The market had an expectation of -200k jobs, so on the surface this looks like a huge disappointment, but people had cut their expectations pretty sharply since Wednesday morning so the fact that we didn't lose 350k jobs is probably a little bit of a relief.

Losing 1,000 points in two days positions the market for an interesting Friday - we could get a little relief rally or we could sell-off hard into the weekend. President-Elect Obama is speaking at 2pm so the markets may react to that as well.

Birth/Death Adjustment...The rest of the blogosphere is going to rip the Bureau of Labor Statistics for this number again. The economy shed an estimated 240k jobs in October, but the BLS estimates that 71,000 new jobs were created by the formation of new small businesses? What? Who is forming a new business in this environment (other than certain witty bloggers in the North Country)?

The BLS projects that 43,000 jobs were created by new Professional/Business services, 30,000 in Education and Health Services, etc (this was the largest jump in both industries in over 18 months). I think someone needs to remind the BLS that their model is a Birth and DEATH model . Right now, there have to be more small businesses in professional/business services (mortgage brokers, appraisers, real estate agents, etc) going out of business than starting businesses. I continue to contend that this is plug number in their models to smooth out the data so that the employment situation looks better than reality would suggest.

Thursday, November 06, 2008

Oil continues it's steady mid-year collapse. The dramatic Bank of England rate cuts caused more panicked flow into the US dollars which dramatically impacted oil prices. We're down around $60 again which is probably a natural, currency neutral price for oil. Unfortunately, most markets tend to overshoot there natural fundamental levels in this environment, so expect oil to breakdown a little further.

Jobs - Tomorrow's action will be driven by the 8:30am jobs report. A new consensus seems to be building around -250k to -300k jobs. This would be a stunning drop, but the ability of people to forecast this number has been unbelievably bad this year. Financial services, real estate, and construction losses should be offset by government and healthcare hiring. I'll follow-up tomorrow.

Markets - This has been a particularly rough stretch over the past couple of days. We're back around 900 on the S&P where we've been oscillating for the past couple of weeks. I'm concerned with the level of buy and hold sentiment put forth by the bear turned bull crowd. With just two months left in the trading year we're going to start hearing about tax loss selling and traders locking in gains (read: more selling at inopportune times).

Automakersare back with their hat in hand. The rapid collapse of the auto industry is simply stunning. The Big 3 are going to be shopping a report that shows if one of them goes bankrupt it will cost at least 2.5 million jobs in the US. That's probably an overstatement, but it's going to get the lawmakers attention.

"The heads of the three leading U.S. automakers met with the congressional leaders Thursday to discuss a possible bailout - one day before General Motors and Ford Motor are expected to report sizable quarterly losses and reveal painful cost-cutting measures.

Executives with knowledge of the meetings said they focused on preliminary discussions about what was at stake if one or more automakers fail. The meetings also included Ron Gettelfinger, president of the United Auto Workers union.

"The industry needs time and it needs money and it has neither at this point. That's the purpose of meeting," said one executive.

Among the topics discussed were a $25 billion loan to fund union-controlled trust funds that would be set up in the coming year to cover the health care costs of retirees and their family members. Shifting about $100 billion of those costs from the automakers' balance sheet to the trust funds was a key concession the companies won from the UAW in the 2007 labor deals."

Can we stop throwing money away? Please? There's a piece circulating today that argues that if we continue down this path our debtors are going to start requiring payment in some currency other than us dollars. Now that's a scary scenario.

*******************************************************************The last two bubbles have showed that the shown that our economy struggles to create long term, value creating jobs. Manufacturing is never coming back to the US, Financial Services is never going to be the same, so the only growth industries are government, restaurant/retail, and healthcare. My question to you is simple - what growth industries can resurrect our national economy for the next 50 years? I have a series of ideas that I'll offer for critique in the coming weeks.

The Bank of England slashed interest rates by 1.5 percentage points to 3 per cent in a wholly-unexpected move on Thursday as it cited “marked deterioration in the outlook for economic activity at home” in the teeth of “the most serious disruption for almost a century” in the global banking system.

The Bank noted that in the UK, output fell sharply in the third quarter and business surveys and reports by the Bank’s regional agents pointed to “continued severe retraction” in the months ahead. It cited faltering consumer spending as household budgets were squeezed and credit from external sources dried up.

That's a dramatic move by a central bank who typically moves 25 or 50 basis points at a time. Unfortunately, it's not the cost of money that is the problem right now. You can make money as cheap as you want, but if people chose not to borrow and banks chose not to lend, then the cost of money is a non-issue.

Wednesday, November 05, 2008

1) The end of the election cycle which had been bought aggressively over the past few days and

2) A return to the focus on fundamentals (and one particularly harsh call from Ms. Gloom Meredith Whitney).

The technicians are getting antsy again and I'm concerned about Friday's jobs number. The Gov't data has been about 130,000 jobs worse than the ADP # which was awful today. Goldman Sachs predicted that Friday's employment number could be the worst in 20 years and it won't surprise me if that happens. It will be important to review the birth/death adjustment.

There are an awful lot of bears that became short-term bulls in the past few weeks. It won't take much to shake their confidence - true bear markets wipe out bulls and bears.

Also, note that Dr. Roubini (The Original Dr. Doom) was out today with an article on the prospects of a hard landing in China -- however, I think this is like predicting Lake Effect snow in Pulaski as some point from Jan to March, kind of a no-brainer.

**** Thanks to anyone searching and finding me through the Alexa toolbar. I don't exactly understand the mechanism behind Alexa, but apparently I jumped 1.6 million spots today to the 8 millionth (roughly) most popular website reached through Alexa. ***

This is one of my biggest pet peeves. The argument that stocks will go higher b/c more money will have to be "put to work" or "come off the sidelines". Every talking head on TV keeps referring to all of the money in money market funds, etc.

If I have $100 sitting in my etrade account and I decide to buy 10 shares of xyz for $10/share, my money has come off the sideline, but what about the other side of the transaction? Someone just sold me 10 shares of XYZ at $10 and now has $100 of cash sitting on the sidelines in their account.

This is the most basic tenet of the stock market there are always buyers and sellers (with the exception of IPOs that take new cash into the market), but 98% of professionals don't understand this concept.

The markets will be focused on the jobs number tomorrow. I'm not a tinfoil hat guy, but watch the birth/death adjustment tomorrow, it might really make for a wacky number.

Tuesday, November 04, 2008

There seems to be something dominating the news cycle tonight - apparently there was an election of some sort today - so there is little new economic news out there. A couple of quick observations......

1) We're still rallying on credit thawing and the influx of money on the certainty that the election will be behind us. We're nearing a 20% bounce off our lows and that is the target that many people have set as their peak for the bear market bounce. I'll remind everyone that we had a 50% rally after the '29 crash before blowing through those lows in the '30's.

3) Another plus of falling oil prices - The Ethanol Industry is imploding upon itself.

"Last week, VeraSun, one of the nation’s largest ethanol producers, announced that it had filed for bankruptcy protection after its bets on the price of corn turned out to be wrong — and costly.

Several other small producers have filed for bankruptcy this year, and construction plans for several Midwestern ethanol plants have been postponed or shelved. Shares in the handful of publicly owned ethanol companies have mostly been slumping all year. Aventine Renewable Energy and Pacific Ethanol, for instance, have both lost more than 80 percent of their value since the beginning of the year."

We need to find alternative methods for transportation, but corn-based ethanol is an expensive joke. Thankfully this might go the way of "New Coke".

4) It's a little early to talk about future currency swings, but I'll note that the falling US dollar contributed to a 10% jump in oil prices today back over $70/barrel. Demand in falling sharply for oil, but we shouldn't discount the fact that much of the fall in oil prices has been directly tied to the strength of the US dollar. If people sudden unwind this trade and sell US dollars, then Oil could reverse it's current trend. My long-term expectation is that in 2-4 years, the dollar will be much lower and the oil, unfortunately, will be much higher as a result.

The market's interpretation of the results of the election should be interesting tomorrow.

There are a number of reasons that people can point to for the futures being up - money flowing into the US markets on the hopes that Sen. Obama will win, the election will finally be over so we can shift our focus as a nation back to the economy, etc, etc.

I think the markets have a little more room to the upside, but skilled market participants are talking about getting short a little around 9,500 and going back fully short around 10,000. I can see a lot of merit in that argument. Don't confuse daily stock market swings with the long-term trend.

Monday, November 03, 2008

Oh boy, there was some shocking data out today and not in a good "yeah, the Cowboys scored 28 points in the fourth quarter" sort of shocking. There is a lot to cover - sorry for the long post.

1) I kept looking at this data from Volvo trying to figure out how it could be true. As a little primer - Volvo is the second largest manufacturer of commercial trucks in the world. Net orders for trucks in Europe fell from 41,970 to 115, down 99.9%!!! Apparently, they did get 20,000 orders, but there were 20,000 cancellations as well. That is not a little dip in business. That is a complete seizure of their business. It's worth noting that South America and Asia were still up, but it couldn't offset the stunning collapse in Europe.

2) Car sales were even worse than expected. Everyone knew the numbers would be down this month, but the rate of decline was surprising. This rate of decline could slow if people start feeling better in November, but the ripple effect of falling car sales on the economy could be significant.

"Sales of new cars and trucks plummeted 32% in October, dropping to levels last seen during the deep recession of 1975, as credit tightening and recession fears kept buyers away.Ford, Chrysler, Nissan, Honda and Hyundai, which with GM and Toyota account for more 90% of the new cars sold in the U.S., each reported double-digit sales declines of more than 25%. In response, desperate carmakers are now talking about asking Congress for new tax incentives, such as making interest on car loans deductible or granting tax credits for scrapping old cars — moves designed to encourage consumers to purchase new vehicles. And it's not just Detroit that's hurting. "We would be in favor of some kind of action if it was across the board," said Irv Miller, vice president of public relations for Toyota Motor Co. which saw its sales drop 26% last month in spite of ongoing zero-interest financing deals.

Auto executives, though braced for hard times, were clearly stunned by the latest data. "If you adjust for population growth, this is probably the worst industry sales month in the post-World War II era," says Mark LaNeve General Motors vice president of sales, the nation's largest carmaker, which reported a 45% drop in sales. "In my 27 years, I never saw a month like this. It was like somebody turned out the lights."What?!?!? Another bailout, tax break, etc? All of these plans seemed designed to reflate the artificial bubbles of the past few years. Fixing our economic problems will not be painless or easy, but trying to avoid them by extending more credit is not the answer.

3) ISM Data was dismal. It's not necessarily important to understand what the ISM data represents, but just know that anything above a number of 50 indicates the economy is expanding and a number under 50 means the economy is contracting. Today's number was 38.9.

4) More and more utilities are going unpaid.

"Utilities are becoming more aggressive about collecting money from delinquent customers, leading to a surge in service shutdowns just as economic woes are pushing up the number of households falling behind on bills.Meanwhile, the increasing number of homes left without power -- which could rise as economic pain deepens -- is beginning to worry some consumer advocates and regulators.

In Pennsylvania, PPL Corp. increased shutoffs by 78% in the first three quarters of the year compared with the same period a year earlier."

5) Finally, to all the stock pickers and bottom callers - every one of these talking heads on tv calling the bottom in stocks is using historical data as a reason to buy - "stocks haven't been this cheap since 19xx" or "stocks always decline xx% and then bounce yy%". While this can sound impressive, it's utter nonsense. Tomorrow, go out to your car and paint your windshield black. Now try to drive to work by looking in your review mirror. Well, shouldn't it work? If you see a corner in your rear view, you'll know when to turn, right? Of course not, using old data to predict current action is a fool's game. Things may eventually turn around, but I've got to see some evidence that business activity is improving before I'm willing to get long for anything other than a trade.

Sunday, November 02, 2008

There are a number of interesting stories out there this weekend, but most of them will be lost in the midst of all of the breathless election coverage -- can we please lose the countdown to the election clocks?

1) This story is a little disingenuous, but it could become an issue given the politically charged nature of the bailout.

Goldman to handout $14billion in Bonuses after taking $12 billion from the bailout.

"Goldman Sachs is on course to pay its top City bankers multimillion-pound bonuses - despite asking the U.S. government for an emergency bail-out.

The struggling Wall Street bank has set aside $14billion for salaries and 2008 year-end bonuses, it emerged yesterday.

Each of the firm's 443 partners is on course to pocket an average Christmas bonus of more than $6million.

The size of the pay pool comfortably dwarfs the $12billion lifeline which the U.S. government is throwing to Goldman."I'll play devils advocate. The greatest asset of these Wall Street firms are their people. If they feel slighted these people will flee like Cowboy fans jumping off the bandwagon. So, in theory it is important pay them enough to keep your employees happy. However, the reason that Wall Street is paid so well that they are in the risk business. If you are good at what you do you get paid, if you are not good, you shouldn't get paid. On the surface it appears as though that Wall Street has continued to pay itself as a risk taking venture without taking any risk.

2) US Car companies apparently are working with a long-term plan that is about 24 hours long.

Governors from across the US are asking for more Federal help for the Auto Industry and looking for the government to speed up the release of the $25 billion that we've authorized to help the big 3 retool their factories for small car production.

Unfortunately, in the interim gas prices are plummeting and......I couldn't believe this when I read it....... Ford Rethinks Truck Pullback.

Ford Motor Co. cut truck production too deeply this summer in reaction to rising gasoline prices, the company's top sales analyst conceded, a move that is likely to contribute to a substantial loss expected for the third quarter.

Ford, General Motors Corp., Chrysler LLC and Toyota Motor Corp. each slashed production of full-size pickup trucks in the summer after gas prices shot up to $4 a gallon and truck sales plunged.

Some truck plants were idle for almost the entire third quarter, as auto makers feared that truck sales would remain low and would be outpaced by passenger car demand. Instead, truck sales have bounced back a bit and car sales have eased in the last three months.

Ford sales analyst George Pipas said on Friday that the company could have kept its truck output at a higher level. "It was an overcorrection," he said.

Truck production and sales can have a sharp impact on the auto maker's profit. In general, each truck sold generates about $8,000 in pretax profits. Ford is expected to report third-quarter results Nov. 7. In the second quarter, it lost $8.7 billion.So gas prices dip and Ford, GM and Chrysler are ready to flood the market with more trucks getting 14 miles per gallon. In three years, when the US dollar has been cut in half by runaway inflation and oil is trading at $130 again, I want to personally go to Detroit and turnout the lights on these companies.

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About Me

I grew up in La Fargeville before attending college in Manhattan and ultimately working on Wall Street for about 10 yrs. I left NYC/NJ in 2003 and relocated my family to the beautiful waterfront of Clayton, NY. I spend my days caring for my 2 daughters and dabbling in the markets.